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Bush Profiteering from Housing Defaults

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President Bush is determined to end the prejudice against people who want to buy a home but don’t have any money. Since he became president the U.S. Department of Housing and Urban Development has spent more than $120 billion. HUD public-housing projects continue to devastate poor neighborhoods. HUD largesse to local governments continues to finance the confiscation and demolition of private homes, and HUD programs continue to spur fraud and corruption around the nation.

Bush has done almost nothing to reduce HUD’s damage to America. Instead, he is devoting himself to expanding home giveaways. He proclaimed on June 16, 2003,

Homeownership is more than just a symbol of the American dream; it is an important part of our way of life. Core American values of individuality, thrift, responsibility, and self-reliance are embodied in homeownership.

In Bush’s eyes, self-reliance is so wonderful that the government should subsidize it.

Bush could be exposing taxpayers to tens of billions of dollars of losses, luring thousands of low- and moderate-income people to the heartbreak of losing their first house, and risking wrecking entire neighborhoods. Bush’s housing initiatives — especially his “American Dream Down Payment Act” to give free down payments to selected home buyers — were key planks in his reelection campaign. He is also pushing Congress to enact a law to permit the feds to give zero-down-payment mortgages.

The Bush “Dream Act” and the zero-down-payment plan are modeled after “down-payment assistance programs” that have proliferated in recent years. These programs, often engineered by nonprofit groups, routinely involve a home builder giving a “gift” to the nonprofit, which provides a home buyer with money for the down payment. The price of the house is sometimes increased by the same amount as the builder’s “gift.” Almost all the mortgages created with down-payment assistance end up being underwritten or guaranteed by either the Federal Housing Administration (FHA) or Ginnie Mae (the Government National Mortgage Association).

Free down payments carry catastrophic risks. The default rate on mortgages from the largest down-payment-assistance organization, Nehemiah Corp., is 25 times higher than the nationwide mortgage-delinquency rate, according to the HUD inspector general. The default rate on Nehemiah mortgages quadrupled between 1999 and 2002, reaching almost 20 percent. The I.G. warned that permitting the Federal Housing Administration to insure mortgages made with gifts from down-payment organizations is “endangering the FHA insurance pool.” HUD currently has no idea how many of the loans that the FHA is underwriting are closed with down-payment gifts.

Bush began pushing his American Dream Down Payment plan in 2002. The administration’s rhetoric echoed the 1968 Housing Act, which nullified state and local restrictions on where blacks and other groups could live. A June 17, 2002, White House Fact Sheet declared that Bush’s agenda

will help tear down the barriers to homeownership that stand in the way of our nation’s African-American, Hispanic, and other minority families by providing down-payment assistance. The single biggest barrier to home-ownership is accumulating funds for a down payment.

The Bush administration sounded as if requiring down payments is the new version of Jim Crow laws.
Enacting the “American Dream”

The Bush administration finally got its “Dream Act” pushed through Congress in the fall of 2003. The House leadership chose freshman congresswoman Katherine Harris (the Republican hero of the Florida 2000 recount) for the honor of sponsoring the bill. Harris declared,

As our nation continues to confront daunting threats both at home and abroad, we cannot neglect the most basic security of all, and that is a safe, clean, adequate place to live.

One congressional staffer raised the question of whether “HUD will soon send out maids to ensure our right to a clean house.”

When Bush signed the act on December 16, 2003, he declared,

One of the biggest hurdles to homeownership is getting money … so today I’m honored to be here to sign a law that will help many low-income buyers to overcome that hurdle, and to achieve an important part of the American Dream.

He plaintively added,

The rate of homeownership amongst minorities is below 50 percent. And that’s not right, and this country needs to do something about it.

Bush did not specify the precise percentage of blacks and Hispanics that would be “right.” The new law authorized federal handouts of $5,000 each for 40,000 home buyers whose incomes are less than 80 percent of a local area’s median.

The Bush administration and Republicans portray down-payment giveaways as if they were primarily targeted to minorities:

  • After Bush visited a black neighborhood in Atlanta in 2002 to hype his housing-aid proposal, his first HUD secretary, Mel Martinez, explained, “We sell it that way, as a program for minorities, because we want minority buyers for these homes, but it’s available to anyone” who qualifies under income guidelines.
  • When the House passed the American Dream Down Payment Act on October 1, 2003, House Speaker Dennis Hastert hailed the bill: “We will help lift up our African-American and Hispanic communities.”
  • HUD secretary Alfonso Jackson declared in February 2004 that the Bush administration efforts “will help more Americans, particularly minorities, achieve that dream” of homeownership.
  • If the down-payment program actually specifically targeted minorities, it would violate numerous federal laws and the U.S. Constitution.

The “right” of homeownership

A month after signing the “Dream Act,” Bush urged Congress to permit the FHA to begin making zero-down-payment loans to low-income Americans. The administration forecast that such mortgages could be given to 150,000 home buyers in the first year. Secretary Jackson declared,

Offering FHA mortgages with no down payment will unlock the door to homeownership for hundreds of thousands of American families, particularly minorities.

Federal Housing Commissioner John Weicher said in January 2004 that “the White House doesn’t think those who can afford the monthly payment but have been unable to save for a down payment should be deprived from owning a home,” National Mortgage News reported. While zero-down-payment mortgages have long been considered profoundly unsafe (especially for borrowers with dubious credit history), Weicher confidently asserted, “We do not anticipate any costs to taxpayers.”

The Bush administration aims to make more dubious mortgages, even though the percentage of FHA single-family home loans that have defaulted rose 54 percent between 1999 and 2002, reaching 4.25 percent. Roughly 12 percent of all FHA mortgages are past due.

Avoiding making unsound mortgages seems to be the last item on HUD’s list of priorities. Weicher declared in January 2004, “We have been addressing our default rate, and we are now able to help half the families who go into default avoid foreclosure.” This merely suppresses the evidence of a failed policy and sticks taxpayers with a larger bill once the roof finally falls in.
A neighborhood wrecking ball

The FHA continues wreaking devastation in some neighborhoods and cities across the country. A 2002 study by the National Training and Information Center, a Chicago nonprofit organization, found that between 1996 and 2000 21 percent of FHA loans in low-income areas in Baltimore defaulted and 25 percent of FHA loans in low-income areas in Queens, New York, defaulted. Eight of the 22 cities studied had default rates above 12 percent. The FHA paid out more than $5 billion in settlements on defaulted mortgages in 2001. More than 45,000 FHA homes were abandoned and vacant.

Homeownership carries far more financial rude surprises (such as the cost of major repairs) than does renting. If people get into a house they cannot financially handle and go bankrupt, they are much worse off than if they had never received down-payment assistance. Giving people a handout that leads them to financial ruin — as the Small Business Administration perennially does for people unfit to be small business owners — is wrecking-ball benevolence. The virtues of homeownership do not arise from living in a single-family dwelling and holding a piece of paper from a bank. Rep. Ron Paul (R–Tex.) commented,

In the original version of the American dream, individuals earned the money to purchase a house through their own efforts, oftentimes sacrificing other goods to save for their first down payment…. That old American dream has been replaced by a new dream of having the federal government force your fellow citizens to hand you the money for a down payment.

Bush’s freebie hype could make the millions of low- and moderate-income Americans who are saving and scrimping for a down payment feel like fools. Bush talks as if the federal government is obliged to relieve all Americans from the nuisance of ever having to accumulate any personal savings.

Down-payment handouts and zero-down-payments are a great political strategy for Bush. He gets the applause and the political credit now, and the defaults from the program may not surge until much later. He transfers the risk of homeownership from buyers to taxpayers and then pretends he has multiplied virtue in America. He preens as a great benefactor at the same time he undermines those virtues that he is claiming to multiply.

In the early 1930s, shanty-towns of destitute unemployed people were known as Hoovervilles. In the coming years, if neighborhood after neighborhood is wrecked by waves of defaults and foreclosures caused by the reckless new mortgage policies, the areas should be known as “Bush blights.”

This article was originally published in the February 2005 edition of Freedom Daily.

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    James Bovard serves as policy adviser to The Future of Freedom Foundation. He has written for the New York Times, The Wall Street Journal, The Washington Post, New Republic, Reader's Digest, Playboy, American Spectator, Investors Business Daily, and many other publications. He is the author of a new e-book memoir, Public Policy Hooligan. His other books include: Attention Deficit Democracy (2006); The Bush Betrayal (2004); Terrorism and Tyranny (2003); Feeling Your Pain (2000); Freedom in Chains (1999); Shakedown (1995); Lost Rights (1994); The Fair Trade Fraud (1991); and The Farm Fiasco (1989). He was the 1995 co-recipient of the Thomas Szasz Award for Civil Liberties work, awarded by the Center for Independent Thought, and the recipient of the 1996 Freedom Fund Award from the Firearms Civil Rights Defense Fund of the National Rifle Association. His book Lost Rights received the Mencken Award as Book of the Year from the Free Press Association. His Terrorism and Tyranny won Laissez Faire Book's Lysander Spooner award for the Best Book on Liberty in 2003. Read his blog. Send him email.